What is the difference between technical and fundamental trading?

first_imgShare Facebook Twitter Google + LinkedIn Pinterest The stock market is jittery and commodities seem weak. China’s economic problems continue to plague the world. World markets are trying to determine if China’s economic issues are a short-term blip or a long-term problem. Lack of strong export numbers is also raising concerns with traders. One small positive — there were some export sales on the lows last week.With harvest approaching, unsold farmers are moving old crop out of home storage, taking deferred pricing (DP) if offered. Many farmers are estimating (or wishing) national yield will be reduced in upcoming reports. These farmers think we are due for a major surprise that will bump up futures prices substantially. Some will wait to price until harvest, hoping for a rally just before. Others will just bite the bullet and sell now.End users see all of this and are not bidding aggressively, choosing to sit back and be patient. However end users know farmers won’t sell after harvest unless the rally comes, so the basis has not completely fell apart as they get as much coverage on as they can.Many farmers still have more bushels to price that are on DP or just sitting in the elevator than they should. I’ve even heard of farmers still holding 2013 grain in bins in the northern plains. These bushels may ultimately keep a lid on prices during the 2015/16 marketing year. These bushels held over from year-to-year muddy USDA carryout numbers and can surprise the markets from time to time in a negative way.Sorghum (milo) basis has dropped a $1 per bushel recently based upon reduced demand from China. Sorghum has less feed value than corn, but the Chinese allow it to be imported without an import tax that is in place on corn. There is also the non-GMO factor that helped make it more appealing to some customers in China.Fears China won’t import as much this year are high with the recent economic issues plaguing the world’s second largest economy. If this lack of sales continues, sorghum will look to the U.S. feed market as an outlet and see greatly reduced prices from last year. Add this with low-grade soft wheat being pushed into the feed channels, and suddenly corn doesn’t look as bullish long-term without substantial yield revisions.Technical versus fundamentalI was recently asked, “What is the difference between technical and fundamental trading?” as I frequently reference these terms.In general, technical traders are individuals that analyze historical trend information looking for recognizable patterns in past trading data to predict futures prices. Usually this data is crunched by economists and statisticians who use complicated spreadsheets and algorithms to determine their predictions. There are hundreds of different ways to interpret the data and arrive at predicted price points.Technical traders tend to be good at predicting short-term patterns, which is useful for farmers and end users to estimate prices. Keep in mind, most of these people couldn’t tell you the difference between a combine and a tractor. They don’t care about the farmer’s bottom line. They don’t care if it rains or shines. They love numbers, charts and making money. These traders are not even committed to a position. If their data says to buy corn, they will buy corn and hold it until the numbers tell them they should sell corn. These traders make money if the market is constantly moving up or down.Fundamental traders are different. They analyze more general long-term trends.  For instance, they may analyze USDA planting data, ethanol stocks, and weather forecasts. In some cases, they will even drive across the country stopping every 25 miles to count ears to understand bushel counts county by county before anyone else knows. Generally, fundamental traders will have a better understanding of long-term trading.So, which is better? Both ways of trading the market work for those disciplined in their approach. Everyone trading the market has different needs and beliefs of market direction. Obviously, end users have completely different goals than farmers producing the crop. Some days, traders just want the market to move in one direction or the other, which creates opportunity through volatility.My preference is to blend both types of analyses together. I like to have a price goal based on my farm’s break evens. Then, I will adjust my long-term plan based on market fundamentals. However, I may adjust my trades in the short-term slightly, if the technical indications in the market suggest there is opportunity. Goals, plans and discipline are the most important factors into being profitable, without those it doesn’t matter what kind of trade belief you have.Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at [email protected]last_img

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